Tax consequences on the sale of your home

Published on 5/12/2016
Written by: Stacia Getz

As the school year draws to a close and the days lengthen, you may be one of the many homeowners who are getting ready to put their home on the market. After all summer is the best time of year to sell a home. But it’s important to think not only about the potential profit (or loss) from a sale, but also about the tax consequences.

Gains

If you’re selling your principal residence, you can exclude up to $250,000 ($500,000 for joint filers) of gain — as long as you meet certain tests. Gain that qualifies for exclusion also is excluded from the 3.8% net investment income tax.

For one to qualify for the exclusion, the taxpayer must meet both the ownership and use tests. You can meet the use test by living in the house for 24 months out of the last 60 months. The house must be your principle residence. Refer to Publication 523 for the complete eligibility requirements, limitations on the exclusion amount, and exceptions to the two-year rule.

If there are changes in your health, employment (more that 50 miles away) or other unforeseen circumstance, you may be eligible for a partial exclusion when failing to meet the two year period. Members of the military, that move to meet service commitments, are entitled to full exclusions regardless of the length of time they resided in the property.

To prove that your house is your principle residence, the most important requirement is where you spend most of your time. However, the address listed on your voters registration card, drivers license, where you receive your mail and the address that is listed on your federal and state returns will support your primary residence.

If you acquire your home through a section 1031 you may not exclude the gain.

To support an accurate tax basis, be sure to maintain thorough records, including information on your original cost and subsequent improvements, reduced by any casualty losses and depreciation claimed based on business use. Keep in mind that gain that’s allocable to a period of “nonqualified” use generally isn’t excludable.

Losses

A loss on the sale of your principal residence generally isn’t deductible. But if part of your home is rented out or used exclusively for your business, the loss attributable to that portion may be deductible.

Second homes

If you’re selling a second home, be aware that it won’t be eligible for the gain exclusion. But if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 exchange. Or you may be able to deduct a loss.

Learn more

If you’re considering putting your home on the market, please contact Bogdanoff Dages & Co., P. C. to learn more about the potential tax consequences of a sale. You can also click here to read an article by Daniel Goldstein on 10 homeowner tax breaks.